Demonetisation Guesswork

Unknown Unknowns

This is the largest scale pre-meditated currency manoeuvre in history. 

Any 'experts' making estimates of its impact on the economy are throwing darts with blindfolds on. 

Modern economies are extremely complex mechanisms, and throwing a spanner into their heart is not going to yield predictable results.I will not spend too much time on economic theory as I understand it; and the idea is not to toss out another random number on the impact on GDP, but to illustrate the way in which the ripples can work.

A central identity of a monetary economy is MV=PT, where

- M is the money in circulation; 

- V is the velocity of money, the speed with which it moves from hand to hand; 

- P is the price level, and 

- T the number of transactions.

If you take 86% of M out of the identity (leaving 14%, or 1/7), the right hand side, PT, can only remain the same if V compensates, which means it has to go up 7 fold. This seems very unlikely...looking at the behaviour around me, there has been, if anything, a tendency to hoard cash, that is , to actually REDUCE the velocity of money, by postponing purchases. (This will gradually fade; it will also partly be compensated by people migrating a higher percentage of their expenditures to non-cash. But this is not possible for 300++ million people without IDs, smartphones, or debit cards).

If then, PT has to go down, odds are we will see both going down, prices, and transactions. Both will negatively impact economic activity, of which GDP is the primary measure. How much? This is impossible to predict.

At any point in time, many businesses - large and small, industrial, agricultural or services  - are marginal, with cash flow on the edge. Many will fail, and this is part of the cycle of "creative destruction" articulated by economist Joseph Schumpeter. But a huge disruption like this will abruptly push many more over the edge. They will not return in a hurry, and their consumption  will drop, with a second feedback loop into the economy. This feedback could keep echoing into a vicious circle.

The government will try to address this by increasing spending. However, tax revenues will have gone down with reduced  economic activity, so this will lead to greater deficit financing. Will this feed through to inflation coming back? Impossible to say....as I suggest above, the feedback loops are complex and unpredictable.

Expect volatility, especially in prices:
- of goods and services (down, then up?)
- of money, as in interest rate (sharply down, gradual correction?)
- of foreign exchange (down?)

These will feed through to volatility in asset prices - of real estate, stocks and gold.

The rational thing to do would be to prune asset holdings where the corrections are not already too sharp, and keep money aside, to buy at future dips.

Most likely to be hit:
- Domestic consumption, especially rural.
- Real estate

Likely beneficiaries:
- IT, via rupee weakness
- Infrastructure, as the government tries to stimulate the economy.

Unpredictable:
- Banks, which will struggle with crimped credit demand. They will see a one-off kicker from low interest rates, which leads to a jump in bond prices. However, as we have already seen, the Central Bank will go into policy overdrive, as it struggles to keep pace with the unpredictability of economic developments - witness the decision to impound 3.25 lakh crores of sudden bank deposits.

The love of my father

My father passed away on May 2nd, aged 94. The tribute I paid at his memorial service:

Through the soft feathers of sleep, I would feel his presence near me. The presence of my father, sitting quietly by my pillow, waiting for me to wake. Not a word, not even a touch, just the gentleness of his being.

With no urgency, though we had a golf game to play, and he had an office to get to. He would wait till I sensed him, rubbed the sleep out of my eyes, and followed him out of the still-dark house.

It was as if even time, that most unrelenting taskmaster, responded to his calm, and expanded to allow him the grace of accomplishment, without the indignity of hurry or impatience.

My father had always accomplished a great deal. In college, first in the Punjab mill-town of Lyallpur, then in its capital, Lahore, he led the college hockey team, played tennis for the University, won debating medals and topped his bachelor’s exams.

And then here was his son, who floated through school without working too hard, spent his evenings buried in an unending series of story-books, and was about as athletic as Billy Bunter, by which name my Maasi rightfully called me. He would have been justified in feeling that I needed to do more, or better, or both. But he never once let me feel that  I was letting the side down.

I was a dreamy kid, lost in a world of reverie and absent mindedness, always tripping over things; instead of admonishing me, he lovingly  called me “Johnny Head in the Air”. When I was 5 or 6, one of the records he would play for me, a scratchy old 78, went something like this:  

“Hey Diddle Dumpling, My Son John.

Went to Bed with his stockings on

One shoe off and the other shoe on

Diddle Diddle Dumpling, My son John”.

This English nursery song from the 18th century - he played  with  so much joy and relish that you would have thought it was a love song he wrote for his son.

This was love as described in the new Testament - (Corinthians)“Love is patient, love is kind. It does not envy, it does not boast, it is not proud. It does not dishonor others, it is not self-seeking, it is not easily angered, it keeps no record of wrongs.”

My father loved music, from KL Saigal to Brahms, laying the foundation for my life-long seduction by it, and my sister, Kanika’s virtuosity; he sang in a sweet, tuneful voice, and when we went on long journeys, by road or rail, we were always woken to his rendition of the Kabir song -

“Utth Jaag Musafir, Bhor bhayee

Ab rain kahaan, jo sovat Hai

Jo jaagat Hai, So paavat hai

Jo sovat Hai, So khovat Hai…

Jo kal kare so aaj kar le
Jo aaj kare so ab kar le

He never, ever, put off till tomorrow what could be done today. Everything was done on time; he had, as he said, “A place for everything, and everything in its place”.  

But when the time for doing was gone, he transitioned into non-doing with equal ease. I don’t know what the trigger was - because his mind was then still sharp, his perception acute - but one day, he handed his financial affairs over to me. Shortly after, I remember calling our share broker’s office to make some large sales on his account. Rahul called me back - “Are you sure? I know Uncle doesn’t like to sell his core holdings.” I was a little shaken, but went ahead with the sale. A few weeks later, in some other context, my mother asked him about committing to a major expenditure. He pointed to me - “Ask Mohit - he’s in charge”. That was simply that - no fuss, no ceremony - a relinquishment in full trust -  unquestioning, and final.

In his last years, he became more and more quiet. He reserved vocal energy for two circumstances - when we had house-guests, he would ask the family and staff whether their beds were made, soap and towels in place. The other was this long and tender good-night to his grandchildren - most often my son Kedar, who lived under the same roof. “I hope you sleep well. And when you get up in the morning, may you be fully refreshed for the day ahead.”

This long benediction contained about as many words as all of the other words he got through in an average day.

In the end, he saved his breath for the things that really mattered - concern for others, and love of the children.

These are the blessings of our lineage, which we must pledge to carry through the generations...

Learning is not a linear art form

Keynote Speech

Liberal Arts and Business

OP Jindal University Conference - April 2016

The arts is my business, certainly one of my businesses, so you could say that I am biased in my views about  Arts and Business. Or if you were generous, you could say I am well qualified to have a view - I appeal to your charity.

At Teamwork Arts, we celebrate the performing arts - theater, music, dance, and literature. I am, of course, recruited here to talk not of these arts, but of the Liberal Arts - a term I only heard of when the children of my family started looking at college studies. The Liberal Arts tradition, I then learned, is an ancient one, with its origins in Greece. This early democracy took decisions by the direct participation of its citizens - rather than by debate among their elected representatives. Free citizens - as distinguished from slaves - needed to equip themselves with the intellectual wherewithal to meaningfully participate in the conduct of public life; the essential tools of which were considered to be grammar, logic, and rhetoric. If  you took a look at Indian parliament today, you could justifiably say - “Send them all to Ancient Greece”.

Today the liberal arts are a lot more inclusive, encompassing everything from philosophy and psychology to music and art history. A rather more convenient way of looking at the Liberal Arts  is to define what kind of education it is not - professional, vocational, or technical. No doctors, or lawyers, or computer programmers, or MBAs. Nothing that is useful, in other words.

And hence, I guess, the title of this conference - Liberal Arts and Business. If you said IT and business, today, there’s really nothing to discuss, is there? I mean, everybody knows that IT IS business, from Big Basket to Amazon, IT whizkids fulfil all your daily needs. Even your evening ones, with dates via Tinder.  And MBAs? They are the guys who make the fancy presentations, which raise the cash, which pays the programmers, who design the software, that allows you to scan an entire dormitory-worth of possible dates, with the swipe of an index finger.

But art historians, or philosophers, of what use could they possibly be - I mean, to a business?

So let me start with my business - Teamwork. For our team, we look for people with passion, young people who are inspired by theater, and music,  and dance and literature; who are willing to travel the world to support art and artists, to showcase Indian culture to the world, and bring the world’s culture to India. That passion, that dedication to the arts, transcends college degrees and the boundaries of classrooms - and we don’t ever look at academic records. The members of our team love their jobs - if they didn’t, the pace and intensity would burn them out, without the fat salary packets of investment bankers or corporate lawyers.

Like my colleagues at Teamwork,  I was seduced by the performing arts at a young age, and by the time I joined college, I had spent hundreds of hours in rehearsal and on stage, behind mikes in recording studios and live on All India Radio.

The performing arts shaped my life, deepened it in ways I could then only dimly discern. Acting asked you to reflect on the other - other selves, other realities, other relationships. This deeply  internal exercise then used the physical tools of the body - voice, movement, and gesture - to  project this altered self to the audience. In life, attempts to alter one’s being, to shift to different realities, are hesitant, jerky, even false; best done over years, even decades of experimentation. But on stage, aided by the craft of the playwright, the guidance of a director, and the interplay with other performers, theater allows the actor to ‘be’ someone else. And at its best, most rewarding moments, you almost believe you are that someone else, immersed in a flow of give and take, a flow of deep reward that engages the audience and delights your co-performers.

BUT - this was make believe, and outside the performance space was reality - an economy crippled by a colonial legacy, socialism and unthinking state control. Survivors of the partition, my parents had crafted a decent life from their own work, and it was clear I had to do the same... So, I prepared myself for a career in the corporate world, by studying economics. In less than a decade, I had experienced two extremes of that world, first at the lowliest levels of a highly organised, regimented multi-national, Hindustan Lever; then as the leader of a chaotic, under-resourced enterprise struggling to define the rules of engagement in a business sector which hadn’t existed till then -  that of  packaged snack foods. Crax was born, the first entrant into this now crowded space; it was an early success, but even as I rushed to create management systems, planning and order around this young star, I felt a deep sense of loss of my other lives.

One day, I took a deep breath, smelled the fresh air outside of my office cabin, and my chauffeur driven car, and left. Left for the magic of theater, the joyous spontaneity of music, and for time in the elevating beauty and quiet of the mountains.

With those joys also came new-found poverty, and the lack of support systems - no chauffeur, no secretary, no coffee on call. But what the heck, I was free. And I was still young, and I found passion.

From that passion, I founded Teamwork - where our first projects were documentary films shot in tiny villages in remote corners of our nation. Another film-maker had just completed a film on child workers, and got talking to me about the world of street children. Thanks to her, I began exploring the harsh world of life on the street, and was seduced by the vulnerability of these children, and by the tragedy of  potential lost to unfortunate circumstance. In the heat of that grief, I pulled together a support group of relatives, friends and theater colleagues, and we cobbled together a program to work with and for those children. Funds were hard to come by, neighbourhoods were hostile, and the regulatory authorities harsh and exploitative. But every battle hardened our resolve, and - ever so slowly - our work gained traction. We joined hands with an old friend, a film maker called Mira Nair, and called ourselves Salaam Baalak Trust. Today the organisation employs 150 staff, houses 500 children, and works with 50,000 children a year. We dared to dream, and promised the children - “To sleep, perchance to dream” (Pablo Neruda).

Dreams are the foundation of a life of passion. And dreams cannot be taught - by IITs, or IIMs, or the best business schools in the world. They arise  - unpredictably - from interactions - with other people, with books and ideas, with music and theater and cinema.

Let me talk, then, of other dreamers - others who allowed the richness of wide ranging influences to shape their lives. Let me talk of the 1970s, when a counter-culture of love and universal peace rocked the staid world of white America. When students challenged the wars waged by their nation; battled the police on University campuses, and talked of oriental mysticism and Flower Power. When millions of young people experimented with new forms of music, clothing, and ways to get high. Many dropped out, and doped out. The center of this counter-culture was San Francisco. It cannot be just an accident that Silicon Valley, the center of the world’s economic creativity, lies just south of the site of its last major cultural revolution. Art shapes thought; acid dreams .gave way to  electronic dreams, and now  science shapes products more magical than any stoned 1970s playwright could have conjured up.

The engineers who give shape to these dreams are products of Stanford and Berkeley University, and Caltech, institutions that are the recruiting yard of Silicon Valley.. But what about those who dreamed the dreams?

Let me tell you of of one man of that time who dropped out of college and travelled to India to find a guru. Who met his first collaborator  through a mutual fascination with Bob Dylan and a collection of reel-to-reel tapes of bootleg Dylan recordings.

Who once told a reporter that taking LSD was “one of the two or three most important things” he did in his life.[9]

Whose biographer would call him: a "creative entrepreneur whose passion for perfection and ferocious drive revolutionized six industries: personal computers, animated movies, music, phones, tablet computing, and digital publishing."[2

I’m talking, of course, of Steve Jobs, founder of the world’s most valuable company.

His inspirations came from various sources - he took a calligraphy course once, and of it, said, "If I had never dropped in on that single calligraphy course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts."

I’m sure we would have got there, eventually; but the fact is, this is the man who got us there first, with an exquisite sense of aesthetic, inspired by a random course in a dying, pretty useless craft.

Jobs practiced Zen Buddhism, and seriously considered living at a Japanese monastery. Those who didn’t share his counter-cultural roots, he said, would never understand his way of thinking….

The sources of Jobs’ inspiration were incredibly eclectic - he took courses in creative writing; and when given the opportunity to spend time at the Stanford Student’s Union, he didn’t join the electronics club; instead, he put on light shows with a friend for their avant-garde Jazz program. His formative years were not shaped by the narrow specialisation of a technical degree, or the rigour of an MBA. They are truly the fabric of a Liberal Arts education.

It is true, at the same time, that the modern world functions on specialisation; the vibrancy of a city comes from the tens of thousands of super-specialisations it can host. Medicine is a prime example - today, it’s not enough to be a dentist; you have to specialise in root canals, or prostheses such as dentures and implants, or peridontal diseases. If you work in finance, you need to hone your skills in one tiny part of this rapidly developing field - in analysing shares of consumer goods, say; or assessing the quality of home loans; or in structuring interest rate swaps - I’m not even sure what that means!! This kind of super-specialisation requires intense dedication and focus, often to the exclusion of all else.

There is a fundamental tension between this economic and intellectual need and the existential hunger of the soul to consume the world in all its beauty and variety  - it’s art and culture and cuisine and  architecture; its lakes and mountains and deserts; even its suffering, which we can all help to ameliorate.

This is a tension that each of us must resolve for ourselves - in our space, and our time.

But in the choices we make, I would urge anyone who cares to listen - Time is on your side. We live longer than the human race ever did before. And more healthily. Fauja Singh ran his last full marathon at 101. Zohra Sehgal could still move audiences at 102.

If you look after your body and nourish your soul, they will stand you in good stead for a long, long time. There is no race, no hurry to rush from School to University, to post-grad, to a well-paid job in a successful business. If you don’t stop to smell the roses, or sample the grass, you’d be justified in thinking - “Life’s a bitch, and then you die”

I have absolutely nothing against getting into business - I believe in business. I have founded a few, and invested in many. I believe that businesses have enormous force to shape the world. They are uniquely democratic institutions - if people don’t like what you produce, they shut you down, without violence or threat, just by sheer apathy. Businesses allow you to offer employment and opportunity to people of varied talents and desires, to create meaning from their lives, to support their families.

I love the world of business, its intellectual challenges, and the framework it provides for creativity and enterprise.

But above business, I place the business of life.

To quote another restless entrepreneur, Jack Ma:

“I always tell myself that we are born here not to work, but to enjoy life.”

Life, like nature, is not crafted from straight lines. It is shaped by arcs of discovery, by sparks of inspiration, by the sheer randomness of a dance  through the world.

A life well lived does not require us to decide at 20 - "This is what I am going to do for the rest of my life." I turn 60 this summer - and I still don’t know what I am going to do with my life. But I’ve had a blast finding out.

I close with the words of one of my dearest friends, one who has repeatedly inspired me. “When God made time,  He made plenty of it.”

The busy trade of round-tripping funds.

CAYMAN

The largest bail amount in history is of the order of $1.5 bn., for the release of Subroto Roy, “Managing Worker” at Sahara India, a financial organisation which once claimed to be India’s second largest employer. Unable to deposit the amount, Roy has been in Delhi’s Tihar jail since 2014. Among his company’s assets are iconic London and New York hotels, Grosvenor House, and The Plaza, which Sahara said it would sell to spring the boss. For several months, prison authorities gave him access to a conference room with video facilities to facilitate transactions that would enable him to raise the bail. Given the value of the properties on the block, it seems strange that no deals were forthcoming. The 67 year-old Roy no longer makes the headlines.

In 2012, an intriguing headline featured on the pages of Times of India, India’s largest English daily. “Mauritius offers India 2 islands in effort to preserve tax treaty”. According to the paper, “Mauritius has offered a couple of sun-drenched islands to India as part of a trade and investment deal. While the offer has been talked about for a while, Mauritius has revived it - at a time when it's very keen on persevering with the 1983 double-taxation avoidance treaty with India.” Those islands were never ceded to India, and the Times of India retracted the news,  but the very fact that the item was published underlined the importance to Mauritius of its financial relationship with India.

The hotels that didn’t get sold and the islands that were never ceded are linked through the more shadowy realms of India’s financial flows.

Sahara first: Subroto Roy was the flamboyant head of a “residuary non-banking company” or RNBC, which accepts deposits of tiny amounts. Over time, Sahara came to build townships, and own cricket teams, a newspaper, even an airline. When Roy’s two sons were married in 2004, 10500 guests attended the joint celebrations in his 170 acre estate in the north Indian city of Lucknow. A Russian gymnast showered flower petals on guests from a hot-air balloon, flamenco dancers entertained them, and they were joined by the Prime Minister, political leaders from every major party, and the A-listers of Bollywood, India’s cinema fraternity.

Roy’s political connections were well known, and rumors of whose money he was managing changed with every major election. The facts that landed him jail were that he had failed to obtain requisite clearance for the issue of several bond schemes of two Sahara companies, with a total face value of Rs. 20,000 crore, roughly $ 3bn. The Securities and Exchange Board of India (SEBI) ruled the issues to be illegal, and asked Sahara to refund the amounts to its depositors, which Sahara declared to be 30 million in number. This mammoth number allowed Sahara to claim that all individual deposits were of a cash value of below Rs. 10,000, the threshold above which transactions need to be made by cheque or other banking channels.

Confronted by the regulator and the courts, Sahara said the bulk of these deposits had been repaid; further, that no complaints of non-payment had been received. It was unable to satisfy the courts of the former claim, though the latter seemed to be true. When the courts asked for documents pertaining to the deposits, they arrived by the truckload. The courts sent officials out to track depositors selected at random: not one could be located. No depositors, ergo no complaints!

Fed up, the courts ruled that Sahara should deposit Rs. 20,000 crore with SEBI. Roy was thrown into jail, and the price of his “Get Out of Jail” card was set at half this sum, Rs. 10,000 crore. The fact that this sum is not forthcoming leads many to believe that the Sahara assets are not Roy’s to control, and that beneficiaries other than the company determine their disposal.

India’s intelligence agency, the Central Bureau of Investigation, or CBI, estimated in 2012 that 500 billion US dollars of illegal money of Indian origin was stashed abroad. Against that number, the sums involved in the Sahara transaction barely cause the needle to budge.

But unlike in the Sahara case, much of that money does come back. Gains from unrecorded transactions, many related to real estate clearances and transactions, find their way to traditional boltholes overseas, and are held there until required in India.

When this money is ready to return to India, it seeks anonymity. This has been provided by the convenient device of Participatory Notes, or PNs, which allow Foreign Institutional Investors (FIIs) to buy Indian equities without revealing the ultimate beneficiary to our regulators. Since 2000, the largest point of origin of such investments has been Mauritius; in the first decade of this century, 9 of the 10 largest investors in India were based in Mauritius.

Aside from its convenient location (and those lovely islands in the sun), Mauritius has become a financial gateway to India thanks to a Double Tax Avoidance Treaty (DTAC) with India. Capital Gains in India get taxed at the Mauritius rate of 3%, and much of this, I am informed, can be eliminated by local tax avoidance measures. India has a similar treaty with Singapore, which has a much deeper and stronger financial market, but the Limitation of Benefits (LoB)* provisions in Singapore make it less attractive to those in a hurry to move money into India.

What kind of investors would seek the cover of Participatory Notes? Some investors desire anonymity for strategic reasons, not wanting to reveal the extent or timing of their bets on specific assets; others, who are round-tripping illicit funds, get the benefit of the same cover. Some money, it is believed, has both colours at once - and belongs to Indian businessmen who control listed companies, and use the PN route to manipulate the prices of their own stock*.

Concerns about the colour of PN money have existed for almost two decades now, and were formally tabled in 2001 by a Joint Parliamentary Committee on securities scams. Since then, regulators have passed the buck to politicians, who have passed it to each other. In October 2007, in a bullish market flush with liquidity, the regulator banned PNs, and Indian equities crashed. Within the week, the matter was ‘clarified’, by stating the stricture would only apply to fresh exposures. The markets duly recovered.

*To qualify for the capital gains exemption, the Singapore entity must have incurred an annual expenditure of 200,000 Singapore dollars on operations in Singapore in the 24 months prior to the date the capital gains arise.

Since then, there has been much bureaucratic business with disclosure norms and quantitative ceilings on FIIs and the number of sub-accounts they run. But PNs still ply the Indian Ocean: try analysing any form of foreign investment into India - portfolio or direct - and you end up concluding that Mauritius is the largest source of global finance.

Though there is periodic concern about how tax avoidance agreements will affect the Mauritius routing, there is also little incentive to rock this cosy arrangement. At the broader level, FIIs, and the PNs they hold, have become critical to the health of Indian equity markets. Over 20% of the floating stock in listed Indian companies is held by FIIs, and no government wants to rock the boat of our stock markets by triggering an exit, even a temporary one.

In his first year in office, Prime Minister Modi made a two-day visit to the tiny nation, signalling its place in the Indian world-view. Speaking to the Mauritius parliament in March 2015, Prime Minister Modi told its leaders that, while there were concerns about the treaty giving shelter to tax evaders, and it need to be reviewed in that light, “I also assure you that we will do nothing to harm this vibrant sector of one of our closest strategic partners.”

For the time being, at least, Mauritius seems to have been granted status quo - without ceding its islands. A pity about Mr. Roy, though.

* Just 2 weeks after writing this, Mint writes about a company which looks like having used just such a route to regain control of a company which was in danger of getting lost due to debt proceedings:

http://www.livemint.com/Money/OvK6BEVABPdtfCUlNFMNsM/Is-First-International-Group-a-front-for-Dharmesh-Doshi.html

 "the regulator has stated very clearly that banks are required to do additional due diligence on the new buyers and establish that they are not related or are associates of the current promoter group.", but
"Foreign investors, while investing through ODIs (offshore derivative instruments) or P-notes in India, are known to sometimes create such structures that Sebi can find it hard to pinpoint the ultimate beneficiary."

Jai Jawan, Jai Kisan

Prime Minister Lal Bahadur Shastri coined the phrase 'Jai Jawan, Jai Kisan' in 1965, and it became a rallying call for a poor and struggling nation, reeling under a shortage of food grains, and one that had just repelled an attack by Pakistan. Fifty years later, the BJP government has adopted the sentiment, if not the words.

By adopting OROP (One Rank, One Pension), and lionizing one of the soldiers who was killed by elements on Siachen, the Modi government has been in "Jai Jawan" mode for several weeks now. Today, Mr. Jaitley's 3rd budget has added "Jai Kisan" to this stance. The NDA government is now fully transformed to UPA3!

A plethora of new schemes for agriculture and farm welfare were announced. I am clearly sceptical of their value, for 3 reasons. The first is structural — the most crying need for rural areas is to get people off the land, and into jobs in service and manufacturing sectors; this will only happen if urban growth is promoted, not rural schemes. The other two are the bane of government schemes — poor design and implementation; and massive financial leakages. Prime Minister Modi repeatedly claims that he has eliminated large scale corruption in the central government, and I will take him at his word. Corruption at the district, tehsil and panchayat level is quite another matter.

The additional resources for these schemes will come from — a trebling of tax on short-term trading on equity markets (STT on F&O segments); a hike in the Income Tax surcharge on those with incomes over 1 crore, from 12% to 15%; and a 10% tax on dividends for those receiving more than Rs 10 lakh in dividends. "Soak the rich" is standard for those seeking to deepen the honey pot, and the billionaires on TV this morning seemed relieved that the sponge was not applied too vigorously.

A sense of relief was the dominant reaction to this Budget. Two big concerns had built up over the last couple of weeks:

• The first was that Finance Minister Arun Jaitley would abandon, or stray from, the path to fiscal consolidation. This path required him to reduce the fiscal deficit for the coming financial year (FY17) to 3.5%. With the difficult circumstances in the world economy, and the professed need to stimulate growth, it was felt that this budget might postpone that attempt. Today, the FM underlined that this budget will stick to the target of 3.5%.
• The second was that long-term capital gains tax (LTCG) on shares would be reintroduced. This concern was so widely aired a couple of weeks ago that it had the air of a trial balloon. The market tanked sharply. When the Budget had no word of it, the sense of relief was palpable. In retrospect, the LTCG rumor could have been a trial balloon that didn't fly; or, it may have been spin-doctoring, designed for this very sense of relief.

Our bond markets had the most reason to celebrate, as Jaitley clearly signalled that he planned to borrow less in the coming year. Bond yields celebrated by dropping 10-12 bps (0.10 - 0.12%) during the day. In itself, this is not a major move, but it could signal a shift, especially if the RBI governor follows through with a cut in interest rates.

Raghuram Rajan has repeatedly asserted that fiscal consolidation is a necessary pre-condition to further lowering of bank rates. His back-room boys must be looking at the budget numbers to ascertain how credible Jaitley's numbers are — they are a lot better equipped to do so than I! At first glance, though, I do find the projections of a 19.5% increase in indirect taxes, and a 25% in service tax, somewhat optimistic. If Mr. Rajan seems convinced, though, and announces a rate cut, it will have a dual impact on our markets. It would give a stamp of credibility to the budget estimates. And it would make it easier to repair balance sheets, of both borrowers and lenders.

The health of our lending institutions, public sector banks particularly, has been of mounting concern. Mr. Jaitley has earmarked 25,000 crore for the purpose. It's probably not enough, but he also indicated that he would raise funds as required.

From the perspective of markets, the Budget day has passed without too much damage, the most one could wish for. The global scenario is not very encouraging though, and trouble in China looks like it will continue. For many money managers, India and China get clubbed in the same Emerging Markets (EM) basket, so foreign withdrawals could keep our markets weak. That's of unknown strength and duration, so I don't think about it too much. Back to the hard work of finding under-priced stocks with low risk!

This quick review of the budget for FY 2017 was written for Outlook, and published here:

http://www.outlookindia.com/website/story/jai-jawan-jai-kisan/296693